It's going to be ugly in a few spots but it will get better
In the stock market, there is only one thing that's worse than having a reason to sell -- seeing the market fall for no observable reason.
Uncertainty is the enemy. Traders can't calculate and manage risk when they don't know where it's coming from; when they don't know what's wrong.
That's what happened on Monday. A rough day turned into the worst day in the S&P 500 since August 2011. Everyone was asking why.
Now we have a reason why, or at least a believable post-factum explanation. It's that the ETN/ETFs tied to volatility were blowing up and they were probably taking some funds down with them. It certainly looks like Credit Suisse might have lost a half-billion dollars.
It looks bad on many levels. It raises big questions about the future of leveraged ETFs and the role of regulators, the SEC and whoever else was in charge. It will take a long time to sort out.
But now there is a reason, a narrative, a villain and that is actually a good thing. It's something that focuses the broader market's mind and limits the contagion. It's suddenly much easier to get back to buying shares of McDonald's, Microsoft and 3M.
It might take another day or week to sort it out and anything tied to volatility is in for a rough ride for a few days. But I suspect we've seen peak fear for now.
For more on the XIV implosion:
